Given that most of us are here to make money I dare to speak even as the kid on the block.
We all know that money management is more important than entries and exits.
A pattern which I seek in a trading system and never see but I confess I have not looked at 4,880+ systems that are mentioned in C2, is firstly one of constant staking.
Constant staking is important because at any time, a volatile market can inflict pain without warning. A small series of bad luck sometimes leads to a blow out. The forum is littered with them. If you take the notion that for each trade you should be ready for the worst and in as deep as you can get, given that your rules of trading have been satisfied, then you are constrained to constant staking. A trade that is only half worth taking is not worth staking at all in the context of the system being traded. It should be in another system if it is worth trading. Just trading for trading sake is dangerous long term - no matter how innocuous it may look.
Stops are a function of technical analysis and although they can and sometimes should be trailing they should never be lowered, save in a short position. A trader makes a decision. If he is right the trade goes with him and if he is wrong he gets out when the market shows him that his supposition was wrong. Gambling and hoping that Brownian noise may carry him back are as laughable as the Keynesian conundrum, Can you stay solvent whilst the market goes insane? Some traders invite drawdown and even blowout and for sure desertion of aficionados by flouting this rule.
To every system manager who varies his stake, I say, he is trading another system and a new set of calculations should be made for that other system. Who says that every system has to trade all the time. At simplest, one might say that trending belongs trading in one manner and ranging in another. In Alexander Elders interview with Gerald Appel, the inventor of the MACD expressed a preference for range trading. I guess his indicator told him when to get out. Alas, the system operator should switch over and use a properly tuned system to trade another market which begs a different system.
On looking at systems, my second task which is made arduous by the C2 format of presentation is to load the trades and the number of lots taken into Excel to identify the performance of the individual contract. Systems analysis will be easier when it can be made friendlier. In every case so far I have found that the single lot traded constantly gives a far better return for less risk than trader judgment on lot size. The difference is much more than just significant. I await a challenge to this sweeping statement. Scaling, building positions, pyramiding
they fail until I see them work. Please present me with a system which proves me wrong. The short term theory is easy to follow. It is simply the result which provokes my conclusion. Seeing a huge stake for a small return makes me wonder about profit handed back to the market. Had the scaling not been there the quitting with a profit might have been easier.
The nearest I can find to constant staking is with Europips, there the trade size is constant at 20 contracts but this is not constant in trading equity unless it fails to change which it does. It rises sweetly. I mention Europips for two other reasons.
Forex is deemed to be low risk by brokers mostly because stop losses are kicked extremely rarely and then not for much. Gapping is rare and the worst case scenario is reflected in the low margin requirement. That said trading margin should be based upon historical calculation and not upon what a margin clerk is inclined to set. This means that the wick can be turned up for the bold trader who can live with huge drawdowns which will come with a certainty of one. This aspect is more important than an extra winning percentage point on a system which gets exponentially harder with each advance.
My third reason for drawing attention to Europips is the returns have a low standard deviation. For the most part the system either loses 6k or makes 10k; down three or up five bucks. If it hit, that alone, staked on a constant proportion of equity, would make an enviable 3.3% return on every trade. It is not easy to see at first that if the losses are more or less the same, and dependable, the heat can be turned up. Europips improves significantly upon the 3.3% by getting out before either the stop or target has been reached. I guess probably on the way back.
Another feature I like about Europips is that if I decide that I would like to trade a tweak more or less, of that system. I am free to do it by simply varying my percentage. Other systems which trade variable amounts, constrain me to discrete increments which in extreme case would mean that I can either double or half my weighting of a system in my portfolio of systems.
You may wonder why I fret about some percentage change in my allocation to a system.
Asymptotically, which just means in the long run, getting the percentages right matters? With negative correlation which unfortunately can now only be done accurately between a pair can play an increasing role if at least independence can be found between a number of instruments. This coupled with growth to form strong portfolios of systems with correct allocation can lead to a substantial portfolio geometric mean. As the returns alleviate the worst case scenario, so the trading can be increased. Of course it all looks better when displayed in a spreadsheet. To achieve such a framework, I seek the five strongest systems I can find in independent markets. My current target market for systems are index, bond, commodity, interest rates and forex. With my model the weakest tends to get squeezed out.
The paradox of my thinking is that I have no skills on entries and exits. Mixing them optimally is the finest insurance there is for success in the markets. To dream of doing that without a computer would be folly
I feel that I need to expand as I have on what I seek so that the notions raised can be debated and if I am right, the systems can be inflected towards my style of trading.